Diverse boards with misaligned skills hurt business performance

When boards exhibit demographic differences but with misaligned skills—companies tend to underperform, finds new research from Vlerick Business School and The University of Sydney Business School.

Debates that focus solely on single attributes like gender or ethnicity representation on boards are incomplete and risk setting individuals up for failure, the researchers put forward. In contrast, their work shows that more cohesive board correlates with stronger return on assets, which can indicate greater profitability.

Professors Esha Mendiratta (Vlerick Business School) and Sabina Tasheva (University of Sydney Business School) explored how the demographics and professional backgrounds of board members influence company outcomes. Their study examined “faultlines,” or divisions created by differing traits like gender, race, education, and functional experience. They analysed the board compositions of 262 S&P 500 firms across 11 industries from 2002 to 2015.

The Professors found that stronger divisions result in a “double out-group” effect, where individuals who are both demographic minorities and possess different professional backgrounds than the demographic majorities are less likely to be heard, diminishing their contributions and limiting board effectiveness.

“When boards focus solely on representation without addressing how different traits align, they risk reinforcing divides rather than fostering inclusion,” says Mendiratta, Professor of International Business. “This ‘double out-group’ effect makes it particularly difficult for minority directors with distinct professional experiences to influence decisions, as they face barriers on multiple fronts.”

The findings show that faultlines can undermine board effectiveness by fostering sub-groups, reducing communication, and increasing biases. These effects can particularly hinder the contributions of minority directors, limiting their ability to influence decisions effectively.

“The formation of sub-groups and divisions on boards leads to poorer communication and decision-making,” says Mendiratta. “This can prevent boards from fully benefiting from the diverse perspectives that minority directors bring, ultimately lowering performance.”

The study also highlights how these divisions can be managed. More shared experiences between CEOs and minority board members – shared tenure or shared functional experiences through their careers – can mitigate the effect of these divisions. When CEOs and minority directors share backgrounds, minority perspectives can be incorporated more effectively.

These research findings underscore that focusing on single attributes of board diversity (e.g., gender, ethnicity etc.) alone is insufficient for success. Organisations must view diversity as multidimensional—considering the interplay of demographics, professional backgrounds, and skills—to unlock its true potential and improve outcomes.

This research was published in the Strategic Management Journal in September 2024.

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For a copy of the paper, or to speak with the researchers, please contact Alexandre Lopez at BlueSky Education at alex@bluesky-pr.com.